5 historic years

Steve Clayton - Fund Manager

1 December 2021

Steve Clayton - Head of Equity Funds

We launched the HL Select UK Growth Shares fund almost five years ago, since then, two other stablemates have followed, the HL Select UK Income Shares fund and the HL Select Global Growth Shares fund. The Select team of fund managers, analysts and dealers has grown from three to seven, and we now look after over £1.2bn of Hargreaves Lansdown clients’ money.

Along the way, we’ve seen significant events. Brexit turned from a vote to a reality. A pandemic swept the globe, claiming the lives of millions. The world was becoming more digital well before Covid appeared, but its arrival accelerated trends dramatically. Along the way, we have seen the valuation of leading technology groups soar into the trillions of dollars.

In 2019, Boris Johnson’s Conservatives swept to the largest UK parliamentary majority of any government since Tony Blair’s 2001 landslide. Over in the States, President Trump’s extraordinary time in office came to an unseemly end with the storming of the Capitol. President Biden won the vote, but not enough seats in Congress to provide real power to effect change. China’s emergence as a new superpower is more evident, less so how they will exercise that power. Russia invaded Crimea whilst threatening other borders, and the US pulled out of Afghanistan. Both took flak for their actions.

Politics increasingly plays second fiddle to climate science in grabbing public attention. Ultimately though, it is the politicians who will decide how much notice is taken of climate science. Covid has shown just how hard it is to model real-world outcomes in advance. The difference to date, though, is that whilst Covid modellers have often wildly overestimated how much Covid duly turns up, Climate Change modellers have all too often made the opposite mistake.

Looking back over those last five years and how we have managed the portfolios, what might seem surprising is what little impact “events” actually had. Indeed, “events” and how they have ultimately played out have reinforced the Select team’s view that focusing on the long term is the key to success.

We asked team members to talk about when the Select approach has shone through in the last five years for them.

Amelia Nunn gives Zebra Technologies as an example, a manufacturer of industrial automation technologies that help track the flow of goods from the factory floor, through distribution and onto their point of sale.

“The attraction here was that the need to drive efficiencies, from factory to shelf, was only going to become more critical. The pandemic helped boost this further, but the underlying demand looks set to grow for many years as the digital world integrates supply chains ever more tightly. At Select, we seek out businesses where we can see long-term growth potential, backed up by wide and deep competitive moats. Find those, and you have the opportunity to compound returns for years and years”.

Charlie Huggins has long focused on identifying the DNA within companies that separates them from their rivals. “We invested into Experian on the very first day that we launched the HL Select UK Growth Shares fund, and it is now the largest position we hold. Experian’s insights are of increasing value to financial institutions and marketers, providing access to data on consumers and trends globally. The pandemic barely touched their operating income levels, and we see more potential ahead”.

For Gareth Campbell, the fast-changing external environment proved the value of understanding the growth drivers underpinning every investment. “A lot of businesses got blown off course by the pandemic, and the key was to understand which could best get back on course to allow us to separate the wheat from the chaff. We can’t say we saw a pandemic coming, but our deep understanding of the growth drivers that underpin each of the stocks we hold allowed us to quickly focus on those best placed to emerge stronger and exit from those where the damage could prove most lasting”.

Charlie Bonham comments, “Select has always looked for financial strength before it invests into any business. That way “events” don’t tend to matter too much. Resilient businesses can ride over the bumps, regardless of whether these bumps have been caused externally or because management has taken a misstep. We saw that tested to the extreme in the pandemic”.

Looking forward, we see obvious challenges ahead. The transition to Net Zero will drive companies to reinvent how they do business. Paying for the pandemic will surely see governments seek to raise more taxes. Inflation is rising, and workers who felt at risk doing their jobs during the pandemic are unsurprisingly seeking higher wages to carry on doing them.

“The future may look daunting”, says Steve Clayton, Head of the Select team, “but strong companies will continue to thrive. After all, people the world over will still need to eat and drink, raise their children and live their lives to the full, which creates an underlying level of demand that never goes away.

Right at the outset, when we were launching our very first HL Select fund, we talked about the virtuous circle. Companies with fantastic products and services can possess pricing power, which allows fat profit margins and superior cash generation. Free cash flow is critical, it allows businesses to fund themselves without depending on unreliable banks. With solid finances and free cash, companies can reinvest to reinvent themselves, to better their products, drive their emissions lower and set the wheel turning once more.

Carbon pricing by governments, effectively making businesses pay for the emissions they produce, must surely become more widespread and more expensive, making the virtuous circle spin ever faster. Strong companies, who can invest in lowering their emissions, are set to enjoy a structural margin advantage over weaker brethren. We believe that the Select team’s style of investing has its best years ahead!”

This article isn’t personal advice. If you’re not sure an investment is right for you seek advice. Investments rise and fall in value, so you could get back less than you invest.